This column was previously published in L’Express on 13th July 2022
It’s good news that economic activity is starting up again in China. But this doesn’t go very far towards solving all of Beijing’s problems.
Give credit where credit’s due! Shanghai’s shops have reopened and business activity has started up again, blowing a breath of fresh air into the Chinese economy. And the world economy should be delighted to be able to benefit from this. However, this time, it looks as if the world’s locomotive is going to go much more slowly than before.
First of all, the post-Covid Chinese consumer is returning not so much with the hoped-for revenge spending as with healthy caution. A Shanghai inhabitant recently told the Financial Times: “I am 70% happy, 20% traumatized, and 10% vigilant,” — proof that this market is assuredly one of the most attractive in the world, but that the situation has changed. The traditional promotional event of 18th June — the “6.18” — the big moment in the year for Chinese e-commerce — has recovered principally in the high end segments of the market and in purchases by single women determined to show that, in their country, the #MeToo movement manifests itself first and foremost in the total independence of their spending.
Although China is still one of the most attractive markets in the world; things have changed
Secondly, there has been but a moderate resumption of investment in industry, hindered by a private sector forever in search of a clear regulatory framework. In this respect, when the Tencent group came out with a redundancy plan, it announced publicly that it would take some time for the framework to be instituted. This explains the high unemployment rate among young people, particularly among new graduates, more than 50% of whom, according to the recruitment site Zhaopin in April, were looking for a job paying an average monthly salary of 940 dollars, which is 6% less than they were asking last year. But it is primarily the real estate sector that continues to suffer dangerously, causing a seemingly unending number of bond defaults for major property developers. The sudden drop in the price of iron ore seems to indicate that the downturn is here to stay, more specifically in remote provincial cities. There has been a whole cascade of bankruptcies annihilating the wealth effect that should have been the cornerstone of domestic consumption, the “Holy Grail” of government propaganda.
So, once more, it is exports that bring the good news, even if their annual growth is slowing down. What is new — and this is brought out in a recent study by the Natixis bank — is that the very weak growth in volume is offset by a positive effect on price; proof that the challenge of moving Chinese exports upmarket is being met. This is a noteworthy performance — not, however, without its risks: a survey carried out by the UBS bank among financial directors of Chinese and foreign companies in China shows that two-thirds of them envisage relocation to Japan, Korea, Singapore and Vietnam, in anticipation of the possibility of American sanctions. This explains why the government is reluctantly using the well-worn recipe of expenditure on infrastructures in a desperate attempt to get near the 5.5% annual growth rate in GNP which is becoming an increasingly unrealistic target. The major element missing from this recovery plan is productivity. The economist George Magnus, a researcher associated with the China Centre of Oxford University, recently stated that, for productivity to increase at this stage of China’s development, the institutions had to be overhauled, for they are what makes it possible to create a “high trust” society. Since the turning point of the summer of 2021, this seems to be a path that China does not want to go down.
The government is using the well-worn recipe of expenditure on infrastructures
China is therefore in danger of making only a meagre recovery, at least until the autumn Congress which is expected to grant President Xi a third term of office, and this is even more likely if new waves of the epidemic come up against the official policy of “zero Covid”, which is scarcely liable to be changed at least until the end of the year. “We now understand better the extent to which we understand inflation so little,” said Jerome Powell, Chair of the American Federal Reserve, making a public admission of his incompetence. In China, the “Little Leap Forward” of the coming quarters Hopefully will not force Xi Jinping’s government to make any similar admission of incompetence with regard to productive economic recovery.